How to Calculate a Cyclically Adjusted Budget Deficit

by James Green; Updated September 26, 2017

The budget deficit is the difference between revenue and spending. Specifically, it is when the government spends more than its collects. Budget deficits may increase during a period of a recession, as governments receive less tax revenue and spend more on unemployment benefits. For this reason, some analysts like to adjust the budget deficit to reflect these times of economic contraction. This way, the budget deficit can be assessed based on government spending at any time, not just the recession.

Step 1

Find dates that qualify as the beginning and end of an economic contraction. These dates should be the first time and last time when the GDP growth of a country is negative, after and before a period of positive GDP growth. The start of negative GDP growth marks the start of a recession. When GDP growth is positive again, the economy has left the recession. These dates can be on an annual or a quarterly basis.

Step 2

Obtain information regarding an economy's budget deficit. This data should be anywhere within the dates of negative GDP growth. Information regarding budget deficits on both an annual and quarterly may be found from the Congressional Budget Office if you are analyzing the budget deficit on the federal level or each state's department of taxation or finance if you are analyzing state-level budget deficits.

Step 3

Obtain information regarding tax revenues for both the time period of recession as well as the time period before the recession. This may be either on the federal or state level. So, if you are analyzing the cyclically-adjusted budget deficit for the first quarter of 2010, you will need total tax revenues for that quarter as well as the last quarter before the economy went into a recession. Subtract recession-era tax revenues from non-recession-era tax revenues. Call this result "R."

Step 4

Obtain information regarding government spending, specifically expenditures on unemployment benefits. You will only need this data if you are analyzing the cyclically adjusted budget deficit on a state, rather than federal basis. You will need to find data for the same time periods as that of tax revenues. Data for spending on unemployment benefits may be found from each state's department of taxation or finance. Subtract non-recession-era unemployment spending from recession-era unemployment spending. Call this result "U."

Step 5

Subtract "R" from the federal budget deficit to obtain the cyclically-adjusted budget deficit. If you are analyzing state-level budget deficits, subtract both "R" and "U" from the state budget deficit to obtain the cyclically-adjusted budget deficit on the state level.